Microfinance and Food Rations

In the latest edition of Pragati, the Indian National Interest Review, Ankit Rawal proposes a new approach to the public distribution of food and the use of microfinance institutions. Since the Public Distribution System (PDS) in India has its share of flaws and is not always able to meet the needs of the poorer families, bringing in MFIs or NGOs may be a useful supplement to the solution.

One of the issues arising in the PDS pipeline is that poor households often have irregular cash flows. This irregularity is one of the reasons that microfinance works so well – loans help smooth consumption. With irregular cash flows, a household may or may not be able to purchase goods when a shop has them in stock.

This is where NGOs already engaged in microfinance can plug the gap. They can provide funds to the poor families to buy their allocated rations from the fair price shops.

Such a project would involve identifying poor households from their existing client list. They would then be required to identify the fair price shops in the area from which they procure their rations. Loans would be distributed to the selected list of families. One way of disbursing these funds is by introducing a “credit card”. Households could buy their rations from the fair price shop on credit while the NGO pays the amount directly to the shop using this card. This loan will then be returned by these poor households—in daily, weekly or monthly instalments—over the period of the month from their income. If the NGO charges interest to cover transaction costs, the households are likely to enjoy substantial savings.

The proposal is an interesting one, but the question arises as to whether this solution is just another stop gap and whether solutions should focus more on improving the leaks in the PDS pipeline rather than coming up with a whole other system. India has already tried to implement a better targeted PDS system, with few successes. Is the solution introducing MFIs and NGOs into the mix, or do we need to take a closer look at the implementation of the delivery networks?